Cboe Global Markets, Inc. Q1 FY2021 Earnings Call

Good morning, everyone and welcome to the Cboe Global Markets First Quarter 2021 Earnings Conference Call. Please note this event is being recorded. At this time for opening introductions. I would now like to turn the call over to Debbie Koopman, Vice President of Investor Relations. Ms. Koopman, please go ahead.

Good morning and thank you for joining us for our first quarter earnings conference call. On the call today Ed Tilly, our Chairman, President and CEO will discuss our performance for the quarter and provide an update on our strategic initiatives; then Brian Schell, our Executive Vice President, CFO and Treasurer will provide an overview of our financial results for the quarter as well as an update of our 2021 financial outlook. Following their comments, we will open the call to Q&A. Also joining us for Q&A will be our Chief Operating Officer, Chris Isaacson and our Chief Strategy Officer, John Deters. In addition, I would like to point out that this presentation will include the use of slides. We will be showing the slides and providing commentary on each. A downloadable copy of the slide presentation is available on the Investor Relations portion of our website. During our remarks, we will make some forward-looking statements, which represent our current judgment on what the future may hold. And while we believe these judgments are reasonable, these forward-looking statements are not guarantees of future performance and involve certain assumptions, risks and uncertainties. Actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Please refer to our filings with the SEC for a full discussion of the factors that may affect any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise after this conference call. During the course of the call this morning, we'll be referring to non-GAAP measures as defined and reconciled in our earnings materials. Now, I'd like to turn the call over to Ed.

Thank you, Debbie. Good morning and thank you for joining us today. I hope you're all doing well and staying healthy. We reported solid financial results for the first quarter of 2021 at Cboe Global Markets while continuing to successfully execute on a strategic plan to expand our geographic and asset class footprint, broaden our customer reach, diversify our business mix with recurring revenue and leverage our superior technology. As expected, we have more difficult comparisons this quarter against last year's record first quarter earnings when we saw exceptionally strong trading as the COVID-19 pandemic began sweeping the globe. For the quarter, net revenue was up 2% and adjusted earnings per share was down 7% year-over-year. However, we saw very strong sequential growth across business segments with net revenue up 19% over the fourth quarter of 2020 and adjusted EPS up 26%. Our solid results were driven by record trading in multi-listed options and continued growth in recurring non-transaction revenues as well as the contribution from the acquisitions we completed in 2020. I want to update you on the progress we made this year on four key incremental growth drivers I highlighted last quarter: our plans to launch Cboe Europe derivatives, the opportunity to grow recurring non-transaction revenue, our plans to expand BIDS trading and efforts to extend access to our products and services including retail. First, I'd like to take a moment to highlight a few market dynamics we saw during the quarter. With increased certainty around the political landscape, progress around the vaccine rollout, the reopening of businesses and various companies returning to work, we've seen institutional investors re-engage with our index options and other products this year. Quarter-over-quarter volume increased by 63% in index futures, 29% in index options and 15% in NSBX options. In Europe, our successful BREXIT transition and reintroduction of our Swiss trading on our UK market helped us institute some notable records across our Cboe European equity products during the first quarter. Cboe Europe periodic auctions had record average daily notional value traded of €1.3 billion during the first quarter, up 5% year-over-year. Additionally, Cboe LIS, our European block trading platform powered by BIDS had record market share of 24.1%, up from 22.7% market share one year ago. As clients have recalibrated their models and readjusted to the new trading landscape in Europe, we're pleased to see that our overall market share has increased to 17.9% month-to-date in April, our highest since July of 2020. We're maintaining our focus on investing in long-term growth, building on a strong foundation last year and are excited about the momentum we're seeing across our business. Last month, we announced plans to acquire Chi-X Asia Pacific, which will make Cboe the single point of entry into two of the world's largest securities markets, Australia and Japan. I'll touch on this exciting deal in a moment. But first let me update you on key incremental growth drivers I noted earlier and how this planned acquisition complements several of these growth initiatives. I'll begin with the progress we've made growing our recurring non-transaction revenues. During the first quarter, we achieved 17% growth in recurring non-transaction revenues, exceeding our expectations. This increase includes organic growth of 14%. Brian will share additional details later in the call. But we're increasing our 2021 growth target for organic recurring non-transaction revenues to a range of 10% to 11% from a prior range of 6% to 7%. One of our top priorities remains the continued global expansion of our data and analytics offering and last month we announced the creation of Cboe Data and Access Solutions, a new division that will lead our charge to become a global leader in data and analytics. Led by Catherine Clay, this new division combines our information solutions and market data and access services teams into one route that creates an optimized offering for our global client base. This holistic solution is expected to enable customers around the world to seamlessly access all of Cboe's expanded capabilities including global indices, interface solutions, as well as data, market and risk analytics in a unified offering. Additionally, in connection with the planned Chi-X acquisition, Catherine will lead our effort to build the first true global equities market data platform that is expected to offer data for most major markets around the world. We recognized that if the trading environment becomes more globalized customers require greater efficiency in the market infrastructure services they need and our goal is to align our business to address these client needs for global data and analytics. We're excited about the continued evolution of this business and believe the new data and access solutions suite will create opportunity to further grow our base of recurring non-transaction revenue. Catherine is a tremendous leader with a track record of delivering results and we're excited for her to lead this team. As we look to expand the business and our market data offering globally, turning to Cboe Europe Derivatives. Yesterday we announced plans to go live with this new derivatives market on Monday, September 6 subject to regulatory approval. We originally hoped to launch this new venue in June and while we expect to be operational and ready, the regulatory approval process has taken longer than expected. Given this initiative expands our existing listing capabilities into a new asset class, we're working closely with regulators and continue to have a very constructive engagement with them. Most importantly, we have a critical mass of key market participants ready to support the exchange from day one including banks, clearing firms, market makers and proprietary trading firms who will help contribute to the provision of liquidity and client order flow on the new market. The team has worked incredibly hard to achieve our mission of creating a modern and vibrant Pan-European derivatives market designed to grow the overall derivatives trading landscape while creating new opportunities for customers to express their investment ideas and manage their equity exposure. Our Pan-European model will help provide market participants with the ability to access a modern on-screen derivatives market through one single access point creating efficiencies in trading and clearing. As previously noted, while our 2021 revenue expectations for European derivatives are modest, we're investing for long-term growth and looking for gradual revenue build as we gain traction, expand our product offering and realize the potential we see for considerable growth in this market. Moving to BIDS trading. We see significant opportunity to leverage the planned Chi-X Asia Pacific acquisition to bring BIDS' industry-leading block trading capabilities to this new geography. With BIDS' current network covering major North American and European equities markets, the planned addition of Asia Pacific equities is expected to create a global block trading platform to serve a broader base of customers. The expansion of BIDS in Canada is well underway alongside Cboe's technology integration of MATCHNow, the ATS we acquired last year. With BIDS' extensive global network of more than 460 buy-side investment managers and sell-side constituents, this innovative platform will play a critical role in achieving Cboe's mission of building one of the world's largest global derivatives and securities trading networks. We also remain committed to extending access to our products and services through product innovation, enhancements of our markets as well as expansion of our customer base both institutional and retail and made solid progress on this initiative in the first quarter. Last month, we extended equity trading hours on our EDGX Exchange to offer trading beginning at 4:00 AM Eastern Time and the volume we're handling during this early market session has exceeded our expectations. EDGX is now handling more than 11% of the volume during the early trading session. Earlier this month, we also received approval from the SEC to launch our innovative periodic auctions in the US, paving the way for us to provide customers with an on-exchange alternative to off-exchange electronic block trading by enabling them to trade in size while helping to reduce market impact. As I mentioned earlier, we continue to see strong customer adoption of the related product in Europe and we're excited to build on its success by providing the new version of this product to the US customer base. This long-awaited approval in the US was the result of our steadfast commitment to improving markets for our customers and we look forward to launching this offering in the third quarter of this year. We're also planning to extend global trading hours for VIX and SPX options in the fourth quarter of this year as part of our 24x5 initiative subject to regulatory review. The global trading hours will complement our planned entry into Asia Pacific and are designed to help the growing investor demand for the ability to manage risk more efficiently, react to global macro and economic events as they're happening and adjust SPX index options positions around the clock. The uptick in market engagement from retail and institutional investors alike reinforces the importance of our ongoing commitment to education. Our new core derivatives curriculum from The Options Institute has been met with positive feedback from early participants at various experience levels. We've expanded the derivatives education webinar series to include foundational knowledge on options, pricing models and strategies and we're on track to launch our first set of online on-demand courses in June to further build on derivatives strategies and applications. Additionally, to meet customer demand for even more learning opportunities, The Options Institute is expected to be launching the adjunct faculty program in June. The program features distinguished practitioners specializing in derivative products, risk management decision theory and research. Turning now to our plans to acquire Chi-X Asia Pacific. We believe this deal significantly advances our mission to build one of the world's largest global derivatives and securities trading networks, enabling the further expansion of product offerings to a global network of customers. We believe this exciting investment will complement our North American and European operations and provide a foothold in a key Asia Pacific region, positioning us to become a truly global marketplace for our customers. Chi-X is one of the most successful alternative market operators in Asia Pacific with core exchange operations in Australia and Japan and a significant sales presence in the region. Asia Pacific is an untapped market for Cboe and we're excited about the potential to offer our unique proprietary products and other services to clients in the region. As I noted earlier, the acquisition provides the opportunity for us to expand our global equities business including bringing BIDS to the region. Dave Howson, President of Cboe's European and Asia Pacific Operations will lead our planned expansion into the region working closely with the Cboe team and Chi-X local management team. Chi-X leadership has shown an incredible commitment to innovation across market operations, customer service and technology. I look forward to leveraging the expertise of the team to expand Cboe's geographic reach, enhance existing capabilities and offer new market solutions to investors in the region. The transaction is expected to close in the second or third quarter of 2021 subject to regulatory review and other customary closing conditions. We look forward to welcoming the Chi-X team into the Cboe Global Markets family. With that, I'll turn it over to Brian.

Thanks Ed and good morning, everyone. I hope all of you and your families are remaining safe and healthy. Let me remind everyone that unless specifically noted my comments relate to 1Q, 2021 as compared to 1Q, 2020 and are based on our non-GAAP adjusted results. As Ed just indicated we reported strong financial results for the quarter. This was our third-highest quarter on an adjusted EPS basis. Earnings were down compared to last year's record high, but we continue to build on the positive momentum we ended last year with. We also continued to execute on our strategic initiatives and remain laser focused on building one of the world's largest global derivatives and securities networks to deliver enhanced value to our customers as well as our shareholders. Now a quick review of the quarter. Our net revenue increased 2% with net transaction fees down 7% and recurring non-transaction revenue up 17%. Adjusted operating expenses increased 26%. Adjusted EBITDA of $250 million was down 6% and finally, our adjusted diluted earnings per share was $1.53, down 7% compared to last year's record quarterly results, but up 26% quarter-over-quarter. Turning to the key drivers by segment, our press release and the appendix of our slide deck include information detailing the key metrics for each of our business segments. So I'll just provide summary thoughts. The revenue decline in our options segment was driven by lower trading volumes in our proprietary products offset somewhat by a continuation of strong trading in our multi-listed options, growth in revenue per contract (RPC) in our index and multi-listed options and growth in our recurring non-transaction revenue. The increase in North American equities revenue resulted from the addition of BIDS and MATCHNow, which contributed total revenue of $12.4 million. In addition, recurring non-transaction revenue increased nearly $5 million or 16%, organic growth of 15%. The revenue decline in futures resulted from lower trading volumes in VIX futures. The revenue increase in Europe primarily reflects the addition of EuroCCP which contributed $12.1 million. As Ed noted, we achieved some notable records in European equities in the first quarter underscoring our successful BREXIT transition and the reintroduction of Swiss trading on our market and we continue to make meaningful progress on the planned launch of European derivatives. Overall we had a solid quarter given the challenging comparisons and finally in FX, the revenue decline was due to lower ADNV resulting in lower net transaction fees offset slightly by growth in access and capacity fees. In addition, FX market share grew 80 basis points year-over-year to 16.5%. While not included in our prior year results, I want to point out that the businesses we acquired in 2020 achieved double-digit year-over-year revenue growth apart from BIDS which had tougher comparisons like our other trading venues. We recently published historical volume and revenue capture metrics for EuroCCP, BIDS trading and MATCHNow, which are available on our website where we post our monthly volume statistics. Turning to expenses, total adjusted expenses were about $125 million for the quarter, up 26% against last year's first quarter. Excluding the impact of acquisitions, adjusted operating expenses were up 8% or $8 million for the quarter. Most of the expense variance related to the acquisitions was compensation and benefits. While first quarter expenses annualize, they remain below our current expense guidance range of $531 million to $539 million; most of the variance is due to timing. So we're reaffirming our previous guidance for 2021 expenses. As we mentioned on our last earnings call, our plans for 2021 and beyond call for continued investments to drive long-term sustainable growth in our business. We started the year strong, achieving 14% organic growth in recurring non-transaction revenue, well ahead of our targeted growth rate for the year of 6% to 7%. Like prior quarters, most of this growth was driven by additional units or subscriptions versus pricing changes and as Ed mentioned, we now expect the organic annual growth rate in recurring non-transaction revenue to be 10% to 11% for the year. After incorporating our 2020 acquisitions, we similarly now expect the total annual growth rate for this category to be 11% to 12% up from our prior guidance of 7% to 8%. As a reminder, we define recurring non-transaction revenue as access and capacity fees, plus proprietary market data fees. In the aggregate, we continue to expect the acquisitions closed in 2020 to contribute additional annual net revenue growth of 4% to 6% in 2021. Moving to our expense guidance. As I noted earlier, we continue to expect adjusted operating expenses to be in the range of $531 million to $539 million. Furthermore, I want to reemphasize our plan to invest approximately $24 million to $26 million this year to drive incremental and sustainable long-term organic revenue growth and high conviction, high return opportunity. This includes our European derivatives build out as well as investments to increase access to our existing products and services especially growth in our index options and futures by developing, listing and distributing unique products, enhancing our marketing, education and content and increasing our efforts to tap into the growing base of retail investments. Keep in mind, our current guidance metrics for 2021 do not include the pending acquisition of Chi-X. We will update our guidance accordingly once that transaction has closed. Turning now to a summary of full year guidance. We're reaffirming our guidance for depreciation and amortization, effective tax rate on adjusted earnings and CapEx. A quick note on our effective tax rate which was 27.9% for the quarter, slightly above last year's first quarter rate of 27% and at the lower end of our guidance range of 27.5% to 29.5%. We're reaffirming this guidance under the current tax laws. While we're not providing full year guidance on interest expense absent any additional borrowing and significant changes to LIBOR, our interest expense for the second quarter of 2021 is expected to be $12 million to $12.5 million in line with our first quarter expense of $12.3 million. Moving to capital allocation, our priorities have not changed as we remain committed to investing in our growth strategy while returning excess cash to shareholders through dividends and share repurchases. As you heard from Ed, our recent acquisitions as well as our pending acquisition of Chi-X underscore our conviction and our ability to deploy capital to help enhance organic growth and strategic value over time leveraging the robust infrastructure and technology at the core of our strong operating leverage profile. From a capital return perspective, our strong cash flow generation enabled us to return $93 million to shareholders through dividend and share repurchase in the first quarter. We plan to continue being opportunistic with share repurchases. Our leverage ratio was unchanged at 1.4 times at March 31 versus year end 2020. We ended the quarter with adjusted cash of $264 million, reflecting in part higher balances associated with additional regulatory capital supporting growth in Europe. Now I'd like to turn it back over to Ed for some closing comments before we open it up to Q&A.

Thank you, Brian. In closing I'm pleased with the progress we've made as we continue to execute against our strategic plan and focus on building one of the largest global derivatives and securities networks. Earlier this week, Cboe celebrated its 48th anniversary; the pioneering spirit that drove the creation of our company now fuels our leadership as a global multi-asset market operator. While every year has been remarkable in its own right, the unprecedented events of this past year have reaffirmed why I always knew the entrepreneurial and collaborative team spirit that has always defined Cboe has never been stronger. I'm very proud of what we have accomplished as a team and I look forward to delivering on our vision as the year progresses. With that, I'll turn to Debbie for instructions on the Q&A portion of the call.

Thanks Ed. At this point we'll be happy to take questions. We ask that you please limit your questions to one per person to allow time to get to everyone. Feel free to get back in the queue and if time permits, we'll take a second question. Operator?

The first question comes from Rich Repetto with Piper Sandler.

I'm going to skip the expense guidance. I'd like to focus more on the organic growth of the recurring non-transaction revenue. So I'm just trying to dig under the covers a little bit more. The guidance increased a lot — almost doubled — and I'm just trying to see what increased the momentum a little bit deeper between when you gave the guidance in February to now. What did you see that was able to align it to increase it so much?

Thanks, Rich. Brian, why don't you jump in?

Yes, I'll take that. Thanks. Rich, we're obviously very excited about this — the incremental guidance reflects our increased confidence in that growth rate, which was already strong going in. As you recall, the growth rate in the fourth quarter was also near double-digit growth. I guess just to lay out our investment thesis that we talked about at the end of the fourth quarter results: basically that growth is not accidental; it reflects our strategic approach and that longer effort and it's starting to bear fruit. When you think about the cash flow generation of the organization and where you deploy that capital — which again is a common theme that we wanted to make sure we laid out — part of the expense guidance and part of what we're doing with the cash flow is not simply taking the extra cash and putting it in a sock drawer to let it grow. What reflects the investment thesis is that our global client base has an increasing need for data and analytics and better access. So as you look at the details of where that growth comes from and what we're seeing, it's three parts: growth in demand for access to our markets, growth in demand for our data, and growth in demand for our analytics and that suite of products. On the access side, this is primarily coming from the options, North American equities and Europe businesses — we're seeing a bit of the macro effect of increasing demand and activity, but we're also seeing feedback that firms are looking for more capacity as they're expanding their trading activity. On the data side, we're seeing incremental top-of-book sales particularly on the equities front and 75% of that growth is actually international. There's some U.S. top-of-book sales as well and then in the U.S. we're actually seeing more depth-of-book sales — more share-of-wallet demand coming through. On the analytics side, the analytics suite is starting to come together; we're seeing increased client demand for access to having that same provider. We're seeing growth on the Silexx platform. We're also seeing growth in other third-party integrations like Tradeweb. All of that is coming together from a similar provider. Again, we talked about pre-trade, at-trade and post-trade helping provide that risk analytics framework and that is really starting to bear fruit and explains why we have increased confidence. So going forward, the increased guidance reflects the strong pipeline and again confidence in our efforts and we're just going to continue to leverage our global network — we're really excited to grow this part of the business.

Thanks, very helpful. I was kidding about the expense.

And the next question comes from Dan Fannon with Jefferies.

My question is on M&A and capital allocation. I guess just in general, you've been quite active over the last couple of years. It would help to characterize the current environment and how you're thinking about M&A today. Also, do you consider the suite of products within the umbrella potential divestitures that maybe are less core now than when you acquired them? For example, FX today — growth has been relatively stagnant. So just thinking more holistically, are there parts of the business that aren't strategically important today that might later be sold to fund other priorities?

Sure, Dan. Thank you. Let me start with M&A in general. We made comments in the past and yes, you're right — we've been quite active. On the data and analytics solution, we like where we are; we're in full integration mode. Brian mentioned pre-trade, at-trade and post-trade solutions for our customers — we like that and it's poised for further growth and globalization. So I like where we are on that front for M&A. As for other M&A, you noticed our activity in regions where markets are open for competition, that makes sense for us to take a hard look at. With Japan and Australia being new to the region, we like going into those regions where customers are looking for alternatives to the incumbents in an open way. So we'll keep looking in that regard. Nothing imminent, but certainly always on our radar. Chris, you want to jump in on FX? Couple comments on FX?

Yes, Dan, good question. As I had mentioned, we really like the FX business. We've actually had a really strong growth rate in the last three to four years. While the overall market volumes have not grown that much, our share of the market has grown and our share of wallet has increased. We've used data and analytics again to grow our share and get closer to our customers. We've also added some non-transactional revenues there. We've launched non-deliverable forward products that are growing nicely and our FX platform is gaining traction. So we really like the FX business and even regarding other M&A that we've announced — if you talk about Chi-X Asia, we're looking to close that hopefully soon. It opens up opportunities not just in the equities asset classes of those existing businesses but also we think more opportunity across our other asset classes including FX as we really move into the Asian region.

Thank you.

And the next question comes from Alex Kramm with UBS.

Just want to come back to the recurring revenue growth outlook. You sounded pretty confident, but I think you acknowledged earlier that a couple of macro factors are at play. So just wanted to flesh out what the risk is that some of the strength was driven by activity we've seen in the first quarter and last year from retail flows and what could come off again. Related to that, I know the SIP revenues are not part of that recurring guidance, but I think SIP revenues for the pool really went up a lot in the first quarter. I think some of that was driven by retail. So again, curious if you have any insights into whether the size of the SIP pool is sustainable or where it's sitting right now?

Brian, you want to start on recurring? And Chris, can you comment on the SIP?

Yes, thanks Alex. I would say that as you think about the retail participation, that's not really the primary driver of some of the access growth that we're seeing. That growth is across multiple asset classes, not just retail-driven equities or options. We're seeing growth across the board. Firms are expanding capacity and executing trading strategies; they have not indicated any change that would cause us to be concerned about the sustainability of that participation. So while it's hard to predict the growth rates in any one particular quarter, over time we feel pretty good overall. Again, macro factors exist and we can't ignore them, but we don't think they were the primary driver of our growth.

Alex, just quickly on the SIP as well. We haven't really projected overall SIP market data pool growth for a while. From quarter-to-quarter there will be some market data recoveries to come through. But as Brian mentioned, in quite a bit of detail already, our growth in non-transaction revenue has primarily come from access — people needing more capacity to our markets — as well as data that's unique to us that we're selling here and around the world. As you said, 75% of certain product growth is coming from outside the U.S. So we're excited about that. Our growth plans in non-transaction revenue aren't dependent on the SIP.

Very helpful. Thank you.

And the next question comes from Ari Ghosh with Credit Suisse.

It looks like some of your recent transactions are coming together to form more of a cohesive strategy across your business lines, like the way you're leveraging BIDS for block trading, for example. Curious, are there other areas where you're seeing similar opportunities with newly acquired assets? And Brian, you touched on this a little bit, but curious if the higher recurring growth outlets you now have are resulting from cross-sell opportunities across assets or primarily from stronger standalone asset run rates since the acquisitions?

Ari, thank you. That's a great observation. If you look back over our activity over the last 18 months or so, the story is coming together. We're pleased yesterday to announce the launch of European derivatives, an effort we began well over a year ago, and being able to come to market in September is quite exciting. Taking the leadership that Dave Howson provided in Europe and having him oversee the integration of Chi-X makes perfect sense for our build out. Importantly, you can see the effect and the vision we had with our purchase of BIDS, our partner for years in Europe, being able to move into Canada with our MATCHNow ATS acquisition and then now moving that network and reach into the APAC region. It's coming together nicely. Putting Bryan Harkins in charge of that growth and rollout, I think, positions us well to take full advantage of all of the deals we've completed over the past 18 months. It's great; it is coming together.

Yes, just want to point out again the demand for BIDS in other regions is palpable. As we announced our MATCHNow acquisition and integration, the demand for BIDS is extremely high there. And while we have not closed yet with Chi-X Asia, as Ed mentioned, there's a lot of demand in Asia for BIDS as well. There are already more than 460 buy-side participants on BIDS and we think that we can grow substantially trading existing products that BIDS already trades, but also across new securities in different regions. All of this is underpinned by data and access related to each of these markets and trading networks, and that is actually what's driving the non-transactional outperformance.

Got it. Thanks.

And the next question comes from Chris Harris with Wells Fargo.

Ed, you mentioned that customers are beginning to come back to the proprietary product suite in a bigger way. Wondering if you can expand on that a little bit, maybe talk about what you're seeing there. And then related to that, do you think the shape of the VIX curve and other dynamics that were affecting the complex are now healed?

It's a great question. I think on the macro level this is exactly what institutions were telling us in the second half of last year. I think no better place to look is SPX volume which is right around 1.2 million contracts a day, very consistent for the first four months of the year. What's been interesting is to see the VIX options growth in the first quarter of the year, and that's changed a bit in April, reflecting the efficiency of our institutional users who saw an advantage using VIX options at a time where the difference between realized volatility and implied volatility made buying volatility exposure via VIX options relatively cheap. We saw institutions in a big way move to using VIX options for hedging purposes; that has changed in April as we're seeing a more normal realized-to-implied relationship. So this is exactly the right move from our institutional clients and it's behaving in a very logical way. The overall levels of VIX were higher in Q4 but have come down into the low 20s and now around 20% or just below, moving to a more normal contango shape which should keep the roll-down trade that we've seen in years past. So this is exactly what we expect from our institutions and there's no reason to think that won't continue.

And the next question comes from Owen Lau with Oppenheimer.

Just a quick one from me. How should we think about the incremental financial and non-financial impact to Cboe when the hours for SPX and VIX options are expanded potentially in the fourth quarter of this year?

Thank you. Chris, do you want to talk about our 24x5 effort?

Yes, Owen, great question. We're really excited about 24x5. This hits on one of the major themes which is greater access to existing customers but also access to new customers. As you said, we plan to launch in the fourth quarter pending regulatory approval and we're working very hard on that. We already trade VIX futures 24x5 and this will get us nearly to 24x5 for SPX and VIX options. We call this global trading hours outside of U.S. hours. We saw actually more than 100% growth in that segment in SPX options last year year-over-year and so we're optimistic that as we increase access the volume will follow. As a precursor, we extended our U.S. equities hours to 4:00 AM Eastern, opening up three hours earlier, and we've seen quite an uptick in number of customers and market share during that session, kind of exceeding our expectations. The world is moving to 24x7 in every asset class and we're meeting customer demand as it evolves. I'll hand it to Brian for the financial impact perspective.

Just to add one more point: if you look at the M&A activity and market data sales in APAC, we were a very small team previously working hard. Having a stronger presence with Chi-X Asia and a sales team on the ground, combined with 24x5, brings together timing and awareness that there is demand for access to U.S. markets year-round. If we achieve regulatory approval and close Chi-X, this will come together very nicely.

I wanted to mention that part of that effort is built into our investments that I mentioned earlier as far as revenue expectations. The revenue impact will be more muted in 2021 as we roll this out later in the year. The annualized impact will be greater over time. But the full burden of the expense is shared upfront as we build broader access into the global network, which includes proprietary products. So more muted revenue in 2021 but building for the future.

All right, got it. Thank you very much.

And the next question comes from Brian Bedell with Deutsche Bank.

Maybe just go back to the global data platform concept. If you could talk about the timing of developing a more cohesive platform, which sounds like what you're trying to build with all of the market data you trade — both proprietary and non-proprietary in the U.S. and European markets where you have a lot of data for things that you don't trade. How do you view the proprietary angle and shifting that sale from individual pieces of data to a more cohesive global product that you can sell into institutions? Do you view that as more of a content sale or do you view yourselves as getting into distribution of that content and starting to compete with some of the distributors of data down the road?

Chris, you want to start?

Yes, Brian. We put together the Data and Access Solutions group under Catherine Clay — a tremendous leader. We've recognized the opportunity to create a cohesive and well-packaged data offering globally, and Catherine is leading that charge. I'd say we're in the early-to-middle innings on this effort. We bought Hanweck and TradeAlert last year and are nearly fully integrated; we'll be done by the end of this year. Now we're putting that together with the real-time data coming off all of our exchanges. As Brian mentioned, 75% of certain product growth was sold outside the U.S. It's coming together but packaging and distribution need work and we're excited to get that right. We're exploring cloud distribution and other new ways to reach customers, including those who may not have current access via traditional means. With the expected Chi-X Asia acquisition, we'll have an unparalleled amount of data from equity platforms globally; combine that with our deep analytics and we're very excited. But again, early-to-middle innings as we've just formed this group.

This is John. To add, the acquisitions we've done over the past 12 to 18 months are generally producers of data or data packaging and distribution platforms. We think of them as cohesive assets. What we're seeing in terms of performance and the raise in forward guidance for non-transactional revenue is the increasing return to scale and scope. A concrete example: this past quarter we had a sizable consulting win with a global top-tier buy-side firm to look at their top-to-bottom risk systems, which is likely to lead to a mandate to replace substantial components because we've got a package that really works well together. We look forward to continuing that globally as we have footprint in Europe, Asia and North America; that sales effort should become more routine.

It's important to note we're also on the lookout for new sources of data. CoinRoutes is a great example of us moving into crypto market data — an incredible opportunity to derive data and analytics in crypto. There's more to come as we build this business.

So as we think of the out years 2022, 2023, I know you're not giving guidance yet but it sounds like this will be a good tailwind to organic recurring revenue growth next year and beyond.

Okay, nobody answer that question. It's too forward-looking. Debbie, can we move on?

The next question comes from Ken Hill with Loop Capital.

I wanted to ask about ESG. I didn't hear anything in the comments today, and I know that's an important initiative within Cboe. Given the breadth of your capabilities and exposure across Europe where ESG is perhaps more important, and heading into Asia, are there any opportunities you're excited about either from a transactional product or maybe something on the data side that could resonate going forward?

It's a great question. Before I turn it over to John on the product side, I think it's important to recognize ESG is very top of mind for our employees and for Cboe as a company. It matters to us operationally and culturally. John, do you want to talk about product and index partner opportunities?

Thanks Ed, hi Ken. To Ed's point, it really does start at home — we want to walk the walk and talk the talk. That gives us insight into the thought process behind ESG so we can have intelligent conversations with partners. We will proceed on ESG products, whether data products or tradable products, together with partners. That has always been our forte. If you think about our partners today — FTSE Russell, MSCI, S&P — those partners are all making substantial investments in ESG and leading the way. We fully intend to leverage what they've built and create interesting value-added products off those partnerships and you'll see many of those come to light over the next couple of quarters.

Got it. Thanks for all the detail there.

And the next question comes from Kyle Voigt with KBW.

Just wondering if I can ask a follow-up to an earlier question around customer reengagement and the index options complex. Index options volumes have been relatively flat since 2017 after a long track record of double-digit volume growth. I know in the past Cboe has done a good job gathering more information on end clients to understand who is using your products and why. I'm wondering if you have any color on how the institutional options client mix has changed over the past few years and whether the reengagement you're currently seeing can reaccelerate the complex back to double-digit growth?

That's a terrific question. The biggest observation we see is the change in trade size in the SPX complex. The very large trades we saw before the pandemic have in many cases been replaced with smaller order sizes which is telling, and there's been a big uptick in super short-dated and more retail-style activity. Traditional retail participation has been more present in SPX, VIX and mini products; retail still lacks access to some of our proprietary products. The rotation to smaller order size and the rotation of more traditional retail is what you see today. With SPX around 1.2 million contracts a day, we're still working on providing access to new retail, which we think will be a growth opportunity as we offer mini products and other access points. So that is the big structural change: smaller trade sizes and more retail participation in certain product types, while institutional demand remains important.

Next we have a follow-up from Rich Repetto with Piper Sandler.

This follows the last question and the earlier trading question. It seems like in April someone flipped the switch — if you look at the VIX chart, it dropped down in April and volumes lightened. Any color on that? It seems like we've had a stair-step down in VIX and wondering if the pickup in trading you saw in the first quarter might lighten as we go into the summer, given fewer pandemic-driven work-from-home effects. What's your outlook on volumes as we hit the patch in April so far?

I think overall volumes have softened a bit in April, but a couple of points: the single-name volatility and retail-driven interest in single equities has driven elevated volumes in the most volatile names, which creates demand for macro hedging and products. We saw institutions buy implied volatility in Q1 because implied was cheap relative to realized. That relationship has normalized in April and we expect a rotation back to more traditional roll-down trades as VIX moves toward historically normal levels. From the proprietary product perspective, we aim for sustainable retail engagement through education and long-term investor engagement rather than chasing spikes. So while there will be flashes and headlines, our focus is on sustainable growth.

And next we have a follow-up from Alex Kramm with UBS.

I ask this question every few quarters. What I still miss is evidence that the underlying customer base is structurally growing. I don't know if it's that market data or access fee growth is a sign, but with all the investments you've made in sales efforts and so on, what can you point to that shows new clients, new regions, new customers that are trading now who weren't a year ago? Any indication that client counts are growing healthily?

Great question. Start with data — institutional clients use data and back testing before conversion. We're watching those numbers closely and seeing more international top-of-book sales and depth distribution. On retail, we haven't yet converted the millions of new retail customers from some of the popular platforms into our proprietary product set because those platforms don't provide access to our products. So the low-hanging fruit for us is that conversion — providing access and education so retail can use our products in a sustainable way. So, data growth is a sign, and the conversion opportunity among retail is a significant addressable market for us.

I'll add one concrete example: target outcome products. Over the past year or two, we helped partners build target outcome ETFs and those products went from zero to over $5 billion in assets under management. That product set required work across options, Silexx entry systems, NAV calculations and indexes. We provided the capabilities to partners so they could offer access to our proprietary products through wrapper products. That kind of partnership and distribution is one example of how access is expanding.

Just to clarify, Ed, you focused on retail earlier. That is not a reflection that institutional opportunities are in doubt, right? You're saying retail is a big low-hanging fruit but institutions remain important, correct?

Correct. The data reference was institutional — data and back testing. Retail conversion is a separate, complementary opportunity. Institutions remain central and we're continuing to serve them while also trying to open retail access.

And the next question comes from Sean Horgan with Rosenblatt Securities.

I wanted to come back to the CoinRoutes announcement from December 2020. I think RealPrice data was originally expected to be available in the first quarter of 2021. Can you update us on the progress there and expand on your plans to be involved with crypto more broadly?

Let me start more broadly and John can add specifics on CoinRoutes. Market participants are looking for crypto exposure and access, and we want to build an ecosystem. We start with access to market data — that's the CoinRoutes agreement. From there, you normally have ETF sponsors looking to bring products to market. We'd like to deliver trusted ETFs for customers in a straightforward way. Education and focus are required — we've not done that in a big way yet but we're in it for the long haul and see it as a multi-stage effort: data, then ETFs and then institutional access. John, a couple words on CoinRoutes?

Thanks Ed. Sean, we're actually live now on our CCCY channel and CSMI with the CoinRoutes RealPrice indexes and we're excited about the uptake. A lot of customers are interested and to Ed's point, it starts with identifying accurate reference prices for crypto. From there we can add exchange operator services and other regulated offerings to help bridge the interaction between regulated market infrastructure and the crypto space, offering broader services beyond just data.

That's great. Thanks Ed. Thanks John.

That does conclude the question-and-answer session. I'd like to return the floor to Debbie Koopman for any closing comments.

Thanks. That completes our call this morning. We appreciate your time and continued interest in our company. Thank you.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.